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Lydia Fisher

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"A Moral Disaster" Coming Near You, Produced by Wall Street and Washington

Posted: 06/09/11 05:20 PM ET

Defaulting on our national debt would not be good, dubbed a "moral disaster" by a "Too Big To Fail" bank executive.

"Moral disaster" is already here.

From the making of the financial crisis in the first place to the fallout it leaves behind. Not to mention the in-between multi-trillion absorption by the US government (de facto the American people) of private bank bad debts and bets (bankers kept their bonuses and then some). Take ethics out of economic activity, no surprise the conundrum, the bedlam.

As it goes in the Wall Street boardrooms and executive suites, so it goes throughout the financial system. Parents set the tone in the home. Dangle candy, it's within human nature to test the limits. Cheaters and liars have been around since time in memoriam. If those controlling the levers are cozy, lookin' away or cheatin', we've got problems.

Wall street 2010 bonuses totaled 138 billion, on bank profits greased by stimulus spending and the Federal Reserve's low interest rate policy (hurting savers, those dependent on income). Meanwhile, most Americans struggle to stay afloat. Crises do have a way of crystallizing what's important in our lives, to define our own American Dream, rather than one based on an inflated asset.

As I watch the "Raising the US Debt Ceiling" drama unfold, political jousting, over mere billions -- like ladling an ocean with a spoon -- it's more of the same. Managing to the short-term, managing to self-interest and hoping for a "happily ever after." It's beginning to feel a bit like "rearranging the deck chairs" on the Titanic.

In just 5 short years US national debt doubled from around 7 trillion (2006) to 14.3 trillion -- a direct result of Wall Street bailouts and stimulus spending. Money spent to stem the unwind of a financial crisis fraught with falsehood and fraud -- the packaging/repackaging of bad loans into complex experimental securities (and their derivatives) premised on the illusion that home prices rise forever. The Federal Reserve's easy monetary policy fueled the dysfunctional apparatus.

Excesses resulted from no accountability. Make and get money fast, irrespective of how, from executive suites to those who took loans they could ill afford. Once upon a time, if one sold an unsuitable security to a customer, or failed to disclose information, one was held accountable.

Truth has been relegated to the dustbin.

The legacy, "A Moral Disaster."

Ominous debt for the American people/future generations, joblessness, homelessness, rising poverty rates, deterioration in municipal services, escalating crime (flash mobs attacking innocent citizens), a rapidly falling standard of living for many Americans and on, on, on... an ever-widening societal schism in an era of unprecedented wealth creation. I would note here a Vanity Fair article entitled, "Of the 1%, by the 1%, for the 1%," written by Nobel Prize-winning economist, Joseph E. Stiglitz.

Stay with me here for a moment. Did you catch the headline, "Too Big to Prosecute" -- related to the sale of packaged "toxic waste" doomed to fail and the simultaneous bet against it?

Let's try to understand, if at all possible. Does this mean that "Too Big to Fail" status inadvertently grants such institution immunity (irrespective of reckless behavior) by virtue of it being systemically significant, in its bigness, that it could not be put at risk, or held accountable, as it would put the financial system and economy at risk?

Talk about "moral hazard." If this structural flaw doesn't shake one's confidence in the markets, nor make one wonder about a future crisis, don't know what would. This, mind you, within the larger context of a free market enterprise system.

Don't just take my word for it. Read former TARP Inspector General Neil Barofsky's chilling New York Times Op-Ed piece, "Where The Bailout Went Wrong." His farewell piece the day he vacated his position as chief watchdog of TARP.

For starters,

"...the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior..."

and,

"...credit rating agencies incorporate future government bailouts into their assessments of the largest banks..."

Comically tragic, this financialgate.

During the Savings and Loan crisis (1980s), far less grim in impact, 800 bank executives went to jail out of 1100 cases under investigation. Volumes about the financial crisis have been written -- books, articles, columns, movies made. We've had Congressional hearings, investigations, two major inquiry/investigative reports (by The Financial Crisis Inquiry Commission and the Senate).

Yet, The Beat Goes On.

Wow!